Qualified Opportunity Zones can potentially provide investors with a powerful tax-advantaged investment vehicle for reinvesting capital gains.
By rolling over eligible gains into designated Opportunity Funds, investors can potentially defer taxes, receive a basis step-up, and even potentially achieve permanent exclusion from certain capital gains taxes.
Based on our specific experience with business owner wealth management over the years, we’ll cover how to identify, invest in, and maximize the tax benefits of Qualified Opportunity Zones.
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Qualified Opportunity Zones (QOZs) are defined as “economically distressed communities” designated by the U.S. Treasury for investment and development. (See IRS.Gov article here) They were established in the 2017 Tax Cuts and Jobs Act to spur economic growth and job creation in underserved areas.
The program provided a tax incentive for investors to reinvest capital gains into qualified opportunity funds. These funds directly invest in real estate projects, operating businesses, equipment, and other development within designated QOZ census tracts.
The goals of the QOZ program include revitalizing struggling communities through private investment, improving affordable housing, generating employment opportunities, and creating businesses and services in areas lacking resources. By attracting new capital, opportunity zones aim to facilitate lasting economic renewal.
Investors stand to benefit from major tax advantages for participating, while distressed communities can receive an economic stimulus from the program's incentivized investments.
Overall, it creates an innovative public-private partnership model to target development where it's most needed.
Investors who strategically roll over capital gains into Qualified Opportunity Funds can potentially receive a trifecta of possible tax benefits:
By reinvesting an unlimited amount of capital gains from a prior investment into a QOZ fund within 180 days, the taxes typically due on those gains get deferred until as late as December 31, 2026. This allows more capital to keep compounding tax-free.
Brian Liedel CPA/CFP®/PFS, who focuses on Business Tax Consulting at Kerkering Barberio, shares his insight, “On the tax return for the year of the gain, it is shown in full, and the gain is shown as “excluded” from income, with a code for QOZ. It is then reported on the 2026 tax return.”
It used to be that In addition to tax deferral, investors would receive a 10% step-up in basis on the rolled over capital gains if held in a QOZ fund for at least 5 years. Also, if held for 7 years, the step-up increases to 15%, permanently reducing taxes due.
This is no longer applicable, due to the time this is being published (May 2024). We felt it was important to include this point.
Brian shares, “These two time periods (5 & 7 year holding) needed to be met on or before the 12/31/2026 recognition date; therefore, they no longer apply. It had to be from a gain realized on or before 12/31/2019 to achieve the full 15% step up, and a gain realized before 12/31/2021 for the 10% step up.”
Here's the kicker - any new capital gains achieved from the gain on the QOZ investment is 100% exempt from federal taxes if held for at least 10 years. All appreciation after the 10 year holding period can also be captured tax-free.
Brian confirms, “It is all gain on the QOZ investment, not just the appreciation after 10-year holding. For example, if someone had a $1mil gain on the sale of stock in 2024, they could invest that $1mil amount in a QOZ fund, defer the gain on the $1mil until 2026. Then, after holding the new investment for 10 years (sell in 2034), they can exclude all gain on the sale.”
Brian goes on to clarify, “In the example, the original $1mil is taxed in 2026, which becomes the new tax basis for the investment. If it’s held for 10+ years, and then sold for $10mil, they would have a $9mil gain, but it would be excluded from income.
This combination of tax deferral, up-front discount via basis step-up, and potentially avoidance of future gains taxation creates an advanced wealth-building opportunity.
To take advantage of the tax benefits of investing in Qualified Opportunity Zone (QOZ) funds, investors must meet certain eligibility requirements:
Almost any capital gain from a prior investment can be rolled into a QOZ fund. This includes long-term or short-term gains from assets like stocks, bonds, businesses, real estate, collectibles, and more. The key requirement is having an eligible capital gain event to reinvest.
Brian Leidel CPA/CFP®/PFS again confirms, “Any capital gain, from securities, closely held business, real estate, etc. can be invested in the QOZ fund.”
Investors have just 180 days from the date capital gains are realized to roll over those proceeds into a QOZ fund. Miss this 6-month window and the ability to defer taxes is permanently lost on those specific gains.
While the QOZ program aimed to open up certain opportunities to non-accredited investors, most QOZ funds still require meeting accredited or qualified investor standards. This generally means having $1 million+ net worth or $200k+ annual income.
Careful tracking of capital gain events and prompt action during the 180-day window is crucial to ensure eligibility and maximize the available tax advantages. Consulting experienced QOZ financial planning, legal, and tax experts is highly recommended.
Once capital gain eligibility is confirmed and the 180-day clock is ticking, the next step is evaluating and selecting specific QOZ funds to invest in.
Here is a good starting point for finding qualified opportunity zones in your area from hud.gov:
https://opportunityzones.hud.gov/resources/map
Not all QOZ funds are created equal. Investors should scrutinize factors like:
Qualifying for the tax benefits requires extensive due diligence by the investor on both the fund and underlying QOZ businesses/properties. This includes reviewing:
Special IRS forms are required to properly report QOZ fund investments and defer/exclude gains, including:
Careful adherence to the required reporting and documentation from both investor and fund is critical to ensure the tax benefits are supported if audited.
While much of the attention around QOZs focuses on the investment tax benefits, the program also provides incentives for businesses to actively operate and develop properties within designated opportunity zones.
Businesses headquartered and deriving at least 50% of their gross income from within an opportunity zone are eligible for significant tax preferences, including:
This makes launching or expanding operations into an OZ potentially very appealing.
Qualified Opportunity Funds are also actively investing directly into commercial real estate development and operating businesses located within OZs. This unlocks financing for new construction, property rehabs, equipment purchases, and startup capital injections.
Beyond just the tax incentives, opportunity zones aim to revitalize economically distressed areas through new business formation, job creation, and real estate investment. Bringing new capital can stimulate lasting economic renewal and upward mobility.
Investors aren't just capitalizing on tax benefits, but playing a role in public-private community partnerships targeting underserved regions through development and growth incentives.
Opportunity Zone investing should not be viewed in a vacuum, but rather incorporated as one component of a comprehensive tax minimization plan.
QOZ investments can complement other tax planning strategies for business owner, such as:
Investors can work with advisors to build models for how QOZ benefits layer with other tactics for a holistic tax strategy.
Given the long-term nature of QOZ commitments, choosing the right fund is paramount.
Advisors can help:
While QOZ benefits are maximized at 10+ year holding periods, investors still need clear exit plans, such as:
QOZ investments can be powerful tax tools but require thoughtful integration, selection, and exit planning to optimize. Experienced advisory is strongly recommended.
Qualified Opportunity Zones present a unique chance to potentially defer and reduce capital gains taxes while participating in the economic redevelopment of underserved communities.
As covered in this guide, the major benefits of rolling capital gains into QOZ funds include:
Further, QOZ investments can allow generating income and appreciation from the underlying operating businesses and properties within these designated zones.
If you're an investor, business owner, or real estate developer with eligible gains or interest in Opportunity Zones, your next steps should be:
To further explore Qualified Opportunity Zones and other tax planning strategies for business owners, here are more resources to explore:
Not an Offer, Recommendation or Professional Advice: This document does not constitute advice or a recommendation or offer to sell or a solicitation to deal in any security or financial product. It is provided for information purposes only and on the understanding that the recipient has sufficient knowledge and experience to be able to understand and make their own evaluation of the proposals and services described herein, any risks associated therewith and any related legal, tax, accounting or other material considerations. To the extent that the reader has any questions regarding the applicability of any specific issue discussed above to their specific portfolio or situation, prospective investors are encouraged to contact Instrumental Wealth or consult with the professional advisor of their choosing.